The challenge for any government is to
maintain economic stability for betterment of lives of its people. With respect
to the economic situation of Pakistan, the country is plagued with high prices
of fuel, shortage of power and gas along with high inflation, a major cause of
concern for the masses. High prices commodities and food stuff is further
pushing the middle class below the poverty line. There is no price control
mechanism or authority which keeps a tap on unjustified price increases
therefore, exponential increases are observed time and again resulting in people
reaching the streets to voice their concern. It is said that with a population
of 180 million people, an increase in the population automatically creates
inflation through demand of food and resources. The government continues to
support the budgetary deficits through borrowing from financial institutions
which has resulted in crowding out, increasing interest rate and inflation. With
recent decline in CNG prices by PKR 30, we can very well observe that the system
of overcharging the economy being unjustified where the benefit of the people
and the economy is not kept in mind. It is further estimated that OGRA can
reduce CNG prices further by PKR 30 since the cost to the Government is PKR 12.5
to PKR 15.

During the period of FY12, GDP was
recorded at 4.7 percent. The GDP growth rate is slow and ideally would have
expected to be around 6 percent if the economy was not hampered with
instability. There is immense potential in the market for long term investments,
however, the reduction in the policy rate will show results in the next six
months whether advances have increased through reduction in rate. Although
theoretically it makes sense to pass a judgment on advances, other factors
including cost of inputs, current devaluation, inflation, unfriendly investment
environment, terrorism, corruption to name a few will impact all credit
decisions. With a poor tax base and imports double of exports, the only major
source of funding for the government is borrowing from the private sector,
outstanding stock level reaching of Rs. 1,660 billion. The year-on-year growth
in the private sector credit was only 4.2 percent.

According to SBP, the reason for
decline in private sector credit is electricity and gas shortages, security
conditions, and political environment. Under these circumstances banks were
discouraged to lend based on the risk involved whereas manufacturing concerns
avoided expansion projects. The challenge for SBP with the Monetary Policy is to
reduce inflation and encourage private sector lending alongside an attractive
rate of return for depositors to counter rise in inflation. The Monetary Policy
cannot work in isolation considering external shocks e.g. international oil
prices, recessionary impact, devaluation in interest rates or government
borrowings. Pakistan is a net importer therefore any devaluation in the exchange
rate against the dollar will make imports expensive, put further pressure on the
reserves and increase supply side inflation. Though exports due to such
devaluation are expected to grow, however considering rise in input cost, such
differential may be negated making prices unattractive for the export markets.
Decline in interest rate is expected to stimulate the economy and improve GDP
through enhance production levels. This will only be achievable if economy
provides conducive environment for business growth not hampered through power
shortage, gas curtailment, law and order issues along with political
environment. Additionally if the government does not stop borrowing form the
private sector and increases off take through T-Bill auctions, fresh advances
will be slow.

An encouraging sign for the economy are
worker remittance which average more than USD 1 billion each month, however FDI
has decreased and expected to be less than USD 1 billion at the close of the
year keeping with political uncertainty and law and order issues. The country
recorded worker remittances of US Dollar 13.2 billion in FY12 as compared to US
Dollar 11.2 billion in FY11 seen as a positive sign. It is expected that the
inflow of worker remittances will reach USD 15 billion by FY13 through the
Pakistan Remittance Initiative (PRI) scheme recently launched. Foreign investors
take a strict view on Pakistan keeping into account the country risk, therefore,
if domestic investors are hesitant with investments, it is unlikely that foreign
investments would flow.

The government's total expenditure to
GDP is 19 percent whereas revenue to GDP is 12.5 percent creating a mismatch
which needs to be filled through tax base rather than borrowing from the banking
sector. Though decisions to maneuver the economy also rests in the hand of the
government, what will eventually help resolve the situation is high degree of
integrity and accountability for public so that the government is less reliant
on the banking sector. If government pulls back on borrowings from the banking
system, banks will automatically lend to help maintain the bottom line and
profitability. We can only expect that declining interest rates would assist in
GDP growth, create employment and give wider access to the public through bank
advances.

To encourage the environment of
investments and foreign flows in Pakistan, interest would need to be reduced
further. Once again, private sector investments will not increase through
off-take of credit if the economic environment and macro issues which include
political uncertainty, terrorism and law and orders issues are resolved. Even
these issues remain in status quo and interest rates are further reduced by 300
bps, we may not witness FDI inflows due to such uncertainties. It is ironic that
FDI investments are increasing on a global scale with an incremental rise of USD
1 trillion each year whereas FDI is experiencing a reduction in Pakistan.

The opportunities in Pakistan are vast
for Greenfield investments. Pakistan with its strategic geographic location in
South Asia can capitalize on trade. Pakistan is an aggregation economy as this
sector needs massive investments. Similarly infrastructural developments
including roads, dams and bridges need to be revamped. With the ongoing energy
crisis, investments are required to be made in power projects which are a basic
necessity. If only the petroleum and diesel prices are reduced, the gas used for
transportation can be directed towards the industrial sector for gas generated
power which would reduce the cost of production and assist the Fertilizer sector
with manufacturing of Urea. Investments in Pakistan would therefore depend on a
number of factors where the question does not reside in the reduction in
interest rate alone. For Pakistan to be self-resilient there needs to be a
complete change of mindset to address all macro issues.